Foxtel gets Austar: pay TV pays off

The late
Kerry Packer
was never a fan of pay television. He spent years successfully blocking its launch in Australia, pointing out to successive federal governments the danger of getting the Packer free-to-air television and magazine empire offside.

When pay TV did finally get the green light, Packer flexed his muscle to stop it from carrying ads for several years. The media mogul eventually became a reluctant investor in pay TV, exercising an option to buy 25 per cent of Foxtel from Rupert Murdoch’s
News Corp
for $157 million in December 1998. It was a smart move.

Assuming Foxtel’s proposed $1.52-a-share takeover of regional pay TV company
Austar United Communications
, the Packer group’s 25 per cent stake – which is held by Consolidated Media Holdings, the listed investment company 50 per cent owned by James Packer and 24 per cent by Kerry Stokes’s Seven Group Holdings – will be worth more than $1.6 billion.

Foxtel’s other shareholders, News Corp (which owns 25 per cent) and Telstra (50 per cent), have seen the same appreciation in the value of their investments in a company that lost $700 million in its first 10 years. Foxtel was launched in 1995 and made its first profit in 2005-06.

Merging Foxtel and Austar will create a business with 2011-12 earnings before interest, tax, depreciation and amortisation of about $900 million and a valuation – based on the 10 times earnings Foxtel is paying for Austar – of about $9 billion.

Strip out the $2.3 billion or so of debt Foxtel will be carrying after the Austar purchase is wrapped up and the merged business is worth about $6.7 billion.

Foxtel’s three owners have had many arguments over the years, mainly over their competing and conflicting interests in the media and communications sectors.

Until last week, they also argued over the right price to pay for Austar. But they never disagreed on the logic of buying Austar.

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Foxtel chief executive
Kim Williams
says a merger will generate cost savings of $55 million to $60 million a year. Analysts think the number is more like $70 million to $80 million, prompting Williams to point out that “analysts don’t run businesses".

A merged Foxtel-Austar would be able to use the savings, plus its increased buying power with suppliers, including program producers, to fund lower subscription fees. In theory, lower fees will help lift the penetration of pay TV in Australia, which is stuck at about 30 per cent.

Although Austar’s largest independent shareholder, Arnhem Investment Management (it owns 7.5 per cent), thinks $1.52 is too low, the deal will not be derailed by shareholders.

American media baron John Malone’s Liberty Global owns 54.2 per cent of Austar and is backing Foxtel’s plan. Most of Austar’s local institutional shareholders appear happy with the price Foxtel is offering, which represents a 20 per cent premium to Austar’s share price the day before the offer was revealed.

Uncertainty about how the Australian Competition and Consumer Commission will treat the proposed merger is keeping Austar shares about 12 per cent below Foxtel’s offer price.

But the letter the ACCC sent this week to people it wants to hear from about the takeover indicates getting regulatory approval will not be a big problem.

The ACCC wants to know if a merger will reduce competition in three areas: advertising revenue, the supply of content to consumers, and the purchasing of content.

Foxtel and Austar do not compete for ad revenue or content. The only market in which they compete for subscribers is the Gold Coast, which accounts for just 2 per cent of Australia’s population.

The ACCC might consider how a merger would affect competition in a national broadband network world, although some analysts think the regulator will gloss over this topic given the NBN is many years away.